Bankruptcy and Business: Causes of Bankruptcy

There are several factors that can cause a business to go bankrupt. Sometimes bankruptcy can be caused by financial mismanagement; other times, it is due to circumstances beyond the owner’s control.

Here are some of the main reasons that a business might go bankrupt:

  • External business conditions such as rise in competition, general costs involved in running a business
  • Internal business conditions such as weak management, improper location, client loss and problems related to credit
  • Severe monetary problems such as the loss of capital, inability to secure new capital when required, high debt or difficulties with cash flow
  • Tax problems
  • Accidents can also be one of the prime factors leading to business bankruptcy. Though insurance may cover lawsuits, bureaucratic red tape sometimes prevents the owner from getting the money in a timely manner

There are several unforeseen and unpleasant consequences attached to filing for business bankruptcy:

  • A trustee is assigned to the bankrupt business that eventually forces the sale of business property, even without the prior consent of the owner. Then the trustee pays off the creditors.
  • The business owner may assume that the court will discharge all debt; in reality, many loans remain secured. In this case, the court can force the sale of property to pay the creditors.
  • Foreclosures stall creditors’ efforts only temporarily
  • Business owners often suffer a damaged credit rating
  • Bankruptcy can also negatively affects business investors

Whether financial difficulty occurs due to ineffective business strategies or due to the overall economy, a business owner is left with only three options. The first option is to find ways to secure more financing, the second is to default on loans and the last option is to file for a business bankruptcy. Though the third option is considered to be the easiest way to escape a negative financial situation, it leaves a black mark on the credibility of the business owner. Therefore, considering certain factors, business bankruptcy is generally not regarded to be a wise choice.

It is essential for a business owner to try to overcome the financial problems that often occur due to poor planning and lack of finance and continue to run the business until it turns profitable.